IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v17y2012i2d10.1007_s11142-011-9173-4.html
   My bibliography  Save this article

Management earnings forecast disclosure policy and the cost of equity capital

Author

Listed:
  • Stephen P. Baginski

    (University of Georgia)

  • Kenneth C. Rakow

    (Saint Xavier University)

Abstract

We examine the relation between management earnings forecast disclosure policy and the cost of equity capital in a cross-section of 1,355 firms over a 4-year post-Regulation Fair Disclosure period (2001 through 2004). We find evidence of a negative association between the quality of management earnings forecasting policy and cost of equity capital, and we document that the strength of the association is greater for firms with higher disclosure costs and for firms with more relevant quarterly management earnings forecasts. Our results are robust to the use of multiple methods to address both endogeneity and the measurement error in firm-specific estimates of implied cost of equity capital.

Suggested Citation

  • Stephen P. Baginski & Kenneth C. Rakow, 2012. "Management earnings forecast disclosure policy and the cost of equity capital," Review of Accounting Studies, Springer, vol. 17(2), pages 279-321, June.
    • Handle: RePEc:spr:reaccs:v:17:y:2012:i:2:d:10.1007_s11142-011-9173-4
    DOI: 10.1007/s11142-011-9173-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-011-9173-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-011-9173-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Handa, Puneet & Linn, Scott C., 1993. "Arbitrage Pricing with Estimation Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(1), pages 81-100, March.
    2. Tuomo Vuolteenaho, 2002. "What Drives Firm‐Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    3. Bamber, LS & Cheon, YS, 1998. "Discretionary management earnings forecast disclosures: Antecedents and outcomes associated with forecast venue and forecast specificity choices," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 36(2), pages 167-190.
    4. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy," Discussion Paper 2005-67, Tilburg University, Center for Economic Research.
    5. Peter D. Easton & Gregory A. Sommers, 2007. "Effect of Analysts' Optimism on Estimates of the Expected Rate of Return Implied by Earnings Forecasts," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 45(5), pages 983-1015, December.
    6. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    7. Paul M. Healy & Amy P. Hutton & Krishna G. Palepu, 1999. "Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 485-520, September.
    8. Leuz, C & Verrecchia, RE, 2000. "The economic consequences of increased disclosure," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 38, pages 91-124.
    9. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    10. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    11. McNichols, Maureen & Trueman, Brett, 1994. "Public disclosure, private information collection, and short-term trading," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 69-94, January.
    12. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy," Other publications TiSEM 5960a342-0adc-4f85-bf87-2, Tilburg University, School of Economics and Management.
    13. Dye, Ra, 1985. "Disclosure Of Nonproprietary Information," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 23(1), pages 123-145.
    14. Kim, O & Verrecchia, Re, 1991. "Trading Volume And Price Reactions To Public Announcements," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29(2), pages 302-321.
    15. Peter Easton, 2006. "Use of Forecasts of Earnings to Estimate and Compare Cost of Capital Across Regimes," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(3-4), pages 374-394.
    16. Coller, M & Yohn, TL, 1997. "Management forecasts and information asymmetry: An examination of bid-ask spreads," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 35(2), pages 181-191.
    17. Coles, Jeffrey L. & Loewenstein, Uri & Suay, Jose, 1995. "On Equilibrium Pricing under Parameter Uncertainty," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(3), pages 347-364, September.
    18. Stephen Brown & Stephen A. Hillegeist, 2007. "How disclosure quality affects the level of information asymmetry," Review of Accounting Studies, Springer, vol. 12(2), pages 443-477, September.
    19. John O'Hanlon & Anthony Steele, 2000. "Estimating the Equity Risk Premium Using Accounting Fundamentals," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9‐10), pages 1051-1083, November.
    20. Core, John E., 2001. "A review of the empirical disclosure literature: discussion," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 441-456, September.
    21. Barton, Jan & Waymire, Gregory, 2004. "Investor protection under unregulated financial reporting," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 65-116, December.
    22. Christine A. Botosan & Marlene A. Plumlee, 2002. "A Re‐examination of Disclosure Level and the Expected Cost of Equity Capital," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 21-40, March.
    23. Gintschel, Andreas & Markov, Stanimir, 2004. "The effectiveness of Regulation FD," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 293-314, September.
    24. Lundholm, Rj, 1991. "Public Signals And The Equilibrium Allocation Of Private Information," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29(2), pages 322-349.
    25. James Heckman, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    26. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    27. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    28. Mark H. Lang & Russell J. Lundholm, 2000. "Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?," Contemporary Accounting Research, John Wiley & Sons, vol. 17(4), pages 623-662, December.
    29. Bushee, Brian J. & Matsumoto, Dawn A. & Miller, Gregory S., 2003. "Open versus closed conference calls: the determinants and effects of broadening access to disclosure," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 149-180, January.
    30. Larcker, David F. & Rusticus, Tjomme O., 2010. "On the use of instrumental variables in accounting research," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 186-205, April.
    31. Jennifer Francis & Dhananjay Nanda & Per Olsson, 2008. "Voluntary Disclosure, Earnings Quality, and Cost of Capital," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(1), pages 53-99, March.
    32. James A. Ohlson & Beate E. Juettner-Nauroth, 2005. "Expected EPS and EPS Growth as Determinantsof Value," Review of Accounting Studies, Springer, vol. 10(2), pages 349-365, September.
    33. Luzi Hail, 2002. "The impact of voluntary corporate disclosures on the ex-ante cost of capital for Swiss firms," European Accounting Review, Taylor & Francis Journals, vol. 11(4), pages 741-773.
    34. Gregory S. Miller, 2002. "Earnings Performance and Discretionary Disclosure," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 173-204, March.
    35. Feng, Mei & Li, Chan & McVay, Sarah, 2009. "Internal control and management guidance," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 190-209, December.
    36. Eti Einhorn & Amir Ziv, 2008. "Intertemporal Dynamics of Corporate Voluntary Disclosures," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(3), pages 567-589, June.
    37. Christine Botosan, 2006. "Disclosure and the cost of capital: what do we know?," Accounting and Business Research, Taylor & Francis Journals, vol. 36(S1), pages 31-40.
    38. Diamond, Douglas W, 1985. "Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    39. Bushman, Rm, 1991. "Public Disclosure And The Structure Of Private Information Markets," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29(2), pages 261-276.
    40. Christine A. Botosan & Marlene A. Plumlee & Yuan Xie, 2004. "The Role of Information Precision in Determining the Cost of Equity Capital," Review of Accounting Studies, Springer, vol. 9(2), pages 233-259, June.
    41. Easton, Peter, 2009. "Estimating the Cost of Capital Implied by Market Prices and Accounting Data," Foundations and Trends(R) in Accounting, now publishers, vol. 2(4), pages 241-364, January.
    42. Hirst, DE & Koonce, L & Miller, J, 1999. "The joint effect of management's prior forecast accuracy and the form of its financial forecasts on investor judgment," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 37, pages 101-124.
    43. Ronald A. Dye, 1998. "Investor Sophistication and Voluntary Disclosures," Review of Accounting Studies, Springer, vol. 3(3), pages 261-287, September.
    44. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    45. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    46. Barry, Christopher B. & Brown, Stephen J., 1985. "Differential Information and Security Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 407-422, December.
    47. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The endogeneity bias in the relation between cost-of-debt capital and corporate disclosure policy," Other publications TiSEM 04869b30-e8a9-4ecf-84ae-6, Tilburg University, School of Economics and Management.
    48. Valeri Nikolaev & Laurence van Lent, 2005. "The endogeneity bias in the relation between cost-of-debt capital and corporate disclosure policy," European Accounting Review, Taylor & Francis Journals, vol. 14(4), pages 677-724.
    49. Alon Brav & Reuven Lehavy & Roni Michaely, 2005. "Using Expectations to Test Asset Pricing Models," Financial Management, Financial Management Association, vol. 34(3), Fall.
    50. Core, John E. & Guay, Wayne R. & Verdi, Rodrigo, 2008. "Is accruals quality a priced risk factor?," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 2-22, September.
    51. Lundholm, Rj, 1988. "Price-Signal Relations In The Presence Of Correlated Public And Private Information," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 26(1), pages 107-118.
    52. Peter Easton, 2006. "Use of Forecasts of Earnings to Estimate and Compare Cost of Capital Across Regimes," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(3‐4), pages 374-394, April.
    53. Peter Easton & Gary Taylor & Pervin Shroff & Theodore Sougiannis, 2002. "Using Forecasts of Earnings to Simultaneously Estimate Growth and the Rate of Return on Equity Investment," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(3), pages 657-676, June.
    54. Dan Dhaliwal & Linda Krull & Oliver Zhen Li & William Moser, 2005. "Dividend Taxes and Implied Cost of Equity Capital," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 43(5), pages 675-708, December.
    55. Dan Gode & Partha Mohanram, 2003. "Inferring the Cost of Capital Using the Ohlson–Juettner Model," Review of Accounting Studies, Springer, vol. 8(4), pages 399-431, December.
    56. John O'Hanlon & Anthony Steele, 2000. "Estimating the Equity Risk Premium Using Accounting Fundamentals," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9&10), pages 1051-1083.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marlene Plumlee & Yuan Xie & Meng Yan & Jeff Jiewei Yu, 2015. "Bank loan spread and private information: pending approval patents," Review of Accounting Studies, Springer, vol. 20(2), pages 593-638, June.
    2. Ying Cao & James N. Myers & Linda A. Myers & Thomas C. Omer, 2015. "Company reputation and the cost of equity capital," Review of Accounting Studies, Springer, vol. 20(1), pages 42-81, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schreder, Max, 2018. "Idiosyncratic information and the cost of equity capital: A meta-analytic review of the literature," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 142-172.
    2. Ying Cao & James N. Myers & Linda A. Myers & Thomas C. Omer, 2015. "Company reputation and the cost of equity capital," Review of Accounting Studies, Springer, vol. 20(1), pages 42-81, March.
    3. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 54(2), pages 525-622, May.
    4. Raf Orens & Walter Aerts & Denis Cormier, 2010. "Web‐Based Non‐Financial Disclosure and Cost of Finance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9‐10), pages 1057-1093, November.
    5. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    6. Christine Botosan, 2006. "Disclosure and the cost of capital: what do we know?," Accounting and Business Research, Taylor & Francis Journals, vol. 36(S1), pages 31-40.
    7. Fu, Renhui & Kraft, Arthur & Zhang, Huai, 2012. "Financial reporting frequency, information asymmetry, and the cost of equity," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 132-149.
    8. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy," Other publications TiSEM 5960a342-0adc-4f85-bf87-2, Tilburg University, School of Economics and Management.
    9. Christine A. Botosan & Marlene A. Plumlee & Yuan Xie, 2004. "The Role of Information Precision in Determining the Cost of Equity Capital," Review of Accounting Studies, Springer, vol. 9(2), pages 233-259, June.
    10. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy," Discussion Paper 2005-67, Tilburg University, Center for Economic Research.
    11. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The endogeneity bias in the relation between cost-of-debt capital and corporate disclosure policy," Other publications TiSEM 04869b30-e8a9-4ecf-84ae-6, Tilburg University, School of Economics and Management.
    12. Terry Shevlin, 2013. "Some personal observations on the debate on the link between financial reporting quality and the cost of equity capital," Australian Journal of Management, Australian School of Business, vol. 38(3), pages 447-473, December.
    13. David DeBoskey & Peter Gillett, 2013. "The impact of multi-dimensional corporate transparency on us firms’ credit ratings and cost of capital," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 101-134, January.
    14. Eugster, Florian & Wagner, Alexander F., 2020. "Value reporting and firm performance," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    15. Francesco Mazzi & Paul André & Dionysia Dionysiou & Ioannis Tsalavoutas, 2017. "Compliance with goodwill-related mandatory disclosure requirements and the cost of equity capital," Accounting and Business Research, Taylor & Francis Journals, vol. 47(3), pages 268-312, April.
    16. Rjiba, Hatem & Saadi, Samir & Boubaker, Sabri & Ding, Xiaoya (Sara), 2021. "Annual report readability and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 67(C).
    17. Al-Hadi, Ahmed & Taylor, Grantley & Hossain, Mahmud, 2015. "Disaggregation, auditor conservatism and implied cost of equity capital: An international evidence from the GCC," Journal of Multinational Financial Management, Elsevier, vol. 29(C), pages 66-98.
    18. Echterling, F. & Eierle, B. & Ketterer, S., 2015. "A review of the literature on methods of computing the implied cost of capital," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 235-252.
    19. Hakan Jankensgard, 2014. "A Tale of Beauties and Beasts: Testing the Optimal Disclosure Hypothesis," Multinational Finance Journal, Multinational Finance Journal, vol. 18(1-2), pages 139-167, March - J.
    20. Luc Paugam & Olivier Ramond, 2015. "Effect of Impairment-Testing Disclosures on the Cost of Equity Capital," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(5-6), pages 583-618, June.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:17:y:2012:i:2:d:10.1007_s11142-011-9173-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.